Tuesday, February 10, 2009

No Corn Exports Without Subsidy

China's support of corn prices in the northeastern provinces is distorting the market. As noted in a post a couple days ago, there is now an unusual situation where prices are higher in the northeast than in provinces further to the south, like Hebei and Shandong.

An article from the China Corn Market Net discusses the odd price structure and south-to-north corn movements. Jilin Grain Group has stopped buying corn in Jilin where the price is fixed at 1500 yuan/mt. Instead it has been going south to Henan, Hebei, and Shandong Provinces to buy corn and ship it back north.

The price at the Dalian port in north China is 1460 yuan/mt ($213)Wholesale price in Jilin (northeast) 1340 yuan Farmers' sale price in Jilin 1440 yuanReserve purchase price in Jilin 1500 yuan In Hebei the purchase price is 1300-1350 yuan with better quality and lower moisture.

The movement of corn from Hebei to Jilin is bizarre because normally corn moves south to corn-deficit regions like Jiangsu, Fujian, and Guangdong.

The article says demand for corn has collapsed due to plunging feed demand caused by the melamine incident and the effects of the global economic slowdown, leaving reserve purchases as the main source of demand. Processors and distillers of corn in Jilin Province are losing 200-350 yuan per ton.

Some people in the industry have revived discussion of the possibility of China exporting corn from the northeast and importing in the south. It's 1000 nautical miles from Dalian to Guangzhou, but only 279 nautical miles to South Korea. It is more economical for buyers in the south to purchase imported corn than northeastern corn. One trader says it will be difficult in the long run for northeastern corn to meet the growth in demand in the south. He also suggests that China could export corn to some African countries to even out balance of payments.

The article suggests exports are needed to relieve excess supply of corn. Cancellation of the temporary export will not make Chinese corn competitive. According to the article, Jilin Grain Group has exported 33 mmt of corn since 1999 and they're looking for financial support like a VAT rebate. The trader says South Korea recently bought U.S. corn at $190/mt. With a Jilin price of 1500 yuan, he reckons the export cost of corn would be 1710 F.A.S. and an exporter would lose 580 yuan per ton by matching the U.S. price to S. Korea. The trader calculates that a 13% VAT rebate would save an exporter 172 yuan, still not near competitive. He says more subsidies are needed to revive Chinese corn exports.

China is constrained on this, as it promised to give up export subsidies as a WTO member. Some kind of hidden subsidy might be arranged. Maybe they could claim they're exporting old stale corn they bought at low prices in earlier years.